Euro zone bond yields edge lower after Trump inauguration

By Stefano Rebaudo

Jan 21 (Reuters) - Euro zone government bond yields edged lower on Tuesday after U.S. President Donald Trump said he wouldn't immediately impose new tariffs, leading investors to forecast fewer inflationary policies from the new U.S. administration.

Markets had expected that Trump would announce trade tariffs via executive orders, raising the prospects for higher-for-longer Federal Reserve policy rates.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, was down 0.5 basis points (bps) at 2.48%, after hitting 2.478% its lowest since Jan. 8.

U.S. Treasury yields dropped, with the 10-year down 5.5 bps at 4.55% in early London trade. The lack of concrete tariff measures made investors a little more dovish on the U.S. rate outlook.

"The greatest Trump sensitivity in financial markets is on trade policy, which has a significant direct impact on the dollar and equities, and indirectly on bonds," said Christoph Rieger, head of rates and credit research at Commerzbank.

"It is positive for U.S. Treasuries by easing inflation fears, while the impact on Bunds is more mixed, especially if China trade deflation expectations are priced out," he added.

Germany's two-year yield, more sensitive to European Central Bank rate expectations, fell one bp to 2.21%.

Markets priced in a European Central Bank deposit facility rate at over 2% at the end of 2025.

Italy's 10-year yield was flat at 3.62%.

The gap between Italian and German yields -- a gauge of the risk premium investors demand to hold Italian debt -- dropped to 110 bps. It hit 104.5 bps in early December, its tightest level since October 2021.

(Editing by Bernadette Baum)